Snoopy
Late edit: the SCT wording is terrible that you have quoted which is not helping you.
Deducting the 2 figures gives you the nett balance of work in progress of $4m that is sitting on the Balance Sheet. In most cases (where project costs exceed zero), this has very little bearing on the profit recognised given the low margin %. So no adjustments should be made to their reported profits from this derived figure. From memory I outlined contract accounting in the Mercer thread - found it here:
https://www.sharetrader.co.nz/showth...l=1#post840594
You need to get your thinking around contract WIP where the accounting "appears" to be backwards. A liability owing to a subbie or for some equipment is actually a contract WIP asset, not a contract WIP liability which I have seen you state in this and the Mercer thread. Refer to the example journals pasted below from the Mercer thread.
From the Mercer thread:"Construction accounting (simplistically) works like this:
Invoice (say deposit) to customer:
- Debit Receivables (and is eventually paid)
- Credit Contract WIP
Costs incurred on contract:
- Debit Contract WIP
- Credit Payables (and eventually paid)
Each contract is separately tracked. Those with a nett credit balance are classified as contract liabilities at year end, whilst those with a nett debit balance are classified as contract assets.
Profit is released to the P&L on large contracts according to percentage complete:
- debit Contract WIP
- credit P&L.
So the nett credit balance shows good working capital management in that Receivables are ahead of Payables. And while a credit balance is like deferred income, very little will actually be profit (being the project Margin).
Reading p33 of the [MGL] AR I see nothing that contradicts the above. Think of contract debit balances as a prepayment. The risk with large projects is if you overstate the costs completed to date, then you get a higher % complete and can take a higher % into profit. I'm not saying that is happening (and I haven't checked) but one way of checking this is by looking at the average days in payables to see if there is any any monkey business and/or how many projects have a nett debit balance. The other thing to be wary of is projects with debit balances may be concealing a project loss - again I'm not suggesting that is the case, just providing some background info."
If after reading this you interpret it as showing some sort of accounting impossibility or something nonsensical, then I suggest you work through some examples. If you would like to learn this in more depth, then I'm available for a fee. :)
Links for contract WIP accounting principles:
https://simplestudies.com/principles_of_long_term_contract_accounting.html
https://accounting-simplified.com/if...ion-contracts/
The worked examples I can find online are not helpful so I do not recommend reading those.
Trust me on this: there is nothing to take up with the auditors regarding the contract accounting. If the auditors have expressed concerns about contract accounting, they will be referring to the accuracy of the % complete calculation, which has two key variables being costs incurred to date (easy to check) and total estimated costs for the project (hard to check).
FERG